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Patricia Annino
Patricia Annino
Advising Same-Sex Marriage Couples
Estate planning pitfalls and opportunities revealed.

September 22, 2011
by Patricia Annino, JD, LLM

This summer New York joined Connecticut, Iowa, Massachusetts, New Hampshire, Vermont and the District of Columbia as jurisdictions that recognize same-sex marriage. Before and after the honeymoon, couples should visit their estate-planning attorney or CPA and make sure that their plans are up to date and in place.

Before the Honeymoon

The couple should consider a pre-nuptial agreement. In all states, married couples — whether they are the same sex or not — have an obligation to support each other. Spousal support can include alimony and property division. A prenuptial agreement is a contract between the parties intending to marry that sets forth their rights and obligations to each other when the marriage terminates. A marriage can terminate by divorce or by death. In all U.S. states, a married spouse has a right to that support. The amount and level of support is dictated by the laws of the state and by the circumstances in the marriage. In the negotiation of a prenuptial agreement, the parties can agree to terms that are different from those that the state or the court would provide. It is important to understand which rights of each party and which issues should be negotiated. Each party should be represented by separate counsel.

Before and After the Honeymoon

Each party should make sure that they have decided who would handle financial and medical decisions if they are unable to make those decisions themselves. This is particularly important before the marriage since in most states in this country, individuals who cohabitate and are not yet married do not automatically have the legal authority to make decisions for the person with whom they are living. That authority has to be granted through a legal document, such as a health care proxy for medical decisions and a durable power of attorney for financial decisions. Should disability or incapacity ensue, without those documents in place in which unmarried partner is included, the heirs-at-law are in control of those decisions.

The parties should put estate-planning documents in place. If done prior to marriage, they should be updated and/or ratified after marriage because in many states a subsequent marriage revokes a will in its entirety. This means that the spouse could very well be inadvertently disinherited.

Drafting Wills for Same-Sex Partners

When creating wills for those who are not married, expect more thought and some unique provisions:

  • Should the partners have children, if both partners are not the legal guardians of those children, the will should address this nomination clearly. Protecting the rights of the other parent is much trickier if the legal parent becomes disabled or incapacitated. In that situation, legal documents should be drafted to make sure that the other parent has the legal authority to care for the child, make medical decisions and view school records. Although there is no guarantee in a disputed situation that a judge will honor these requests, the documents provide strong evidence of intent. Some states allow the nomination of a standby guardian — a person who would act in an emergency. If both partners are not the legal parents of the children, second-parent adoption should be considered.
  • It is very important that same-sex partners and same-sex couples have up to date wills. If they do not have wills, the state in which they are domiciled has in effect, through the laws of intestacy, written one for them. If the couple is not married, the assets will devolve to the heirs-at-law and/or blood relatives, and not to the partner.
  • Funeral arrangements can be tricky. The same-sex unmarried couple may wish to make their own decisions and in effect buy their own funerals to minimize any subsequent conflict between the partner and other family members.

Tax Issues Are Tricky for Same-Sex Married Couples

The Defense of Marriage Act of 1996 (DOMA) is a federal law that defines marriage as a “legal union between one man and one woman.” It does not recognize same-sex marriages. Because of DOMA, many of the protections that heterosexual married couples are entitled to are not available for same-sex married couples.

Same-sex married couples may not file a joint federal income tax return. They must file separate tax returns. Same-sex married couples can file a joint state income tax return. However, to do that, they must do a mock-up of a joint federal income tax return first to come up with the right numbers. This can be complicated and expensive.

Same-sex married couples are not entitled to the deceased spouse’s Social Security benefits.

For federal estate-tax purposes, same-sex married couples do not have the ability to take advantage of the federal marital deduction that allows heterosexual couples to transfer their entire net worth to each other without incurring a transfer tax. Same-sex married couples can, however, transfer the maximum exemption amount (currently $5 million) to each other, as under the current law, all citizens have the ability to transfer that sum lifetime or death time to anyone they choose. Since it is not clear what the law will be after December 31, 2012 for any same-sex couple — married or not — with a significant net worth, this may be the time to consider shifting the title to assets from the wealthier partner/spouse to the less wealthy partner/spouse. Of course, as with heterosexual couples, the risk of divorce should be contemplated when making any such transfer.

The ownership and designated beneficiary of all life insurance, retirement planning assets and annuities should be carefully reviewed. Because of DOMA, whether the couple is married or not, who owns the life insurance is particularly important. For federal estate-tax purposes, if you own the life-insurance policy on your life and it is paid to another person, it is fully included in your taxable estate. If it is paid to your spouse and you are in a heterosexual marriage, then even though it is included in your federal estate, it is eligible for the marital deduction; and there are no current federal estate taxes due at the death of the first spouse. If it is paid to your spouse and you are in a same-sex marriage, although it is included in your federal estate, it is not eligible for the marital deduction; and there are current federal estate taxes due at the death of the first spouse. If the ownership of that life insurance policy is held by the other partner/spouse and also the beneficiary, then at the death of the insured partner/spouse, assuming the other partner/spouse is the named beneficiary of that policy, the proceeds can be collected and not be subject to federal estate tax at the death of the first spouse. An alternative to this cross ownership is holding the title to the policy in an irrevocable trust.

Conclusion

As more states adopt same-sex marriage laws, it is increasingly important for the personal financial specialist or CPA advisor to remain abreast of the law and the planning opportunities that can make a significant financial difference to the same-sex couple.

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Patricia M. Annino, JD, LLM the Estate Planning practice group at Prince, Lobel Tye LLP. She is a Fellow of the American College of Trust and Estates Counsel.

* The AICPA’s PFP Section provides information, tools, advocacy and guidance to CPAs who specialize in providing tax, retirement, estate, risk management and investment advice to individuals and their closely held entities. PFP Section members, including PFS credential holders will benefit from additional resources on this topic in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. All members of the AICPA are eligible to join the PFP section. For CPAs who want to demonstrate their expertise in this subject matter, apply to become a PFS Credential holder.